Though the Companies Act tried to address various issues relating to the role of auditors following scams such as the Satyam one, it was always worrying that no serious action was taken against the auditors in India while the SEC took action in the US—while Mahindra Satyam, the new company, paid $10 million as a settlement, Indian affiliates of PwC agreed to pay $7.5 million to the SEC and the Public Company Accounting Oversight Board (PCAOB). This lacunae has been addressed, albeit more than six years after the US action, with Sebi asking Price Waterhouse (PW) to pay around Rs 27 crore of fines—this includes the interest costs—and also banning it from undertaking audits for two years.
The Satyam scandal, as is known, revolved around Ramalinga Raju creating fake receipts and, to cover this up, showing inflated deposits in various banks across the world. While PW argues that it was not complicit and was the victim of Raju’s fraud, Sebi argues PW never sought independent verification of the deposits from banks but relied upon Raju to provide the bank receipts over close to nine years. Similarly, PW was not able to catch the fact that fictitious receipts were being generated which it should have if it was doing the audit thoroughly—even if PW was innocent, as it says, the fact that a reputed auditor was not able to catch the fraud is worrying since it is really the first line of defence when it comes to highlighting the wrong-doings by a company.
Sebi has done well to go after the entire PW network since, it was on the strength of the PW name that the audit contract was given and, in any case, the contract was signed by PW, not the local arm that did the audit for Satyam. PW believes it will get a stay on the Sebi order from the Bombay High Court since Sebi has not shown any “material evidence” of its involvement, that it has learnt the lessons of Satyam and an independent auditor appointed by the US SEC and PCAOB has been satisfied with the quality of its audit practice today. We will have to wait for the court’s verdict but good behaviour today cannot possibly lower a sentence for a crime in the past—subject, of course, to the court agreeing with Sebi on PW’s culpability.